(Bloomberg) — Peloton Interactive Inc. is embarking on a major overhaul, including cutting nearly 800 jobs, raising prices for its Bike+ and Tread machines, and outsourcing functions such as equipment deliveries and customer service to outside companies.
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The changes, which the company announced in a memo to employees on Friday, also include phasing out many of its retail showrooms — a process set to begin next year. It’s the most dramatic change yet under Chief Executive Officer Barry McCarthy, a tech veteran who took over in February.
Peloton hopes to revolutionize a business that thrived during the early days of the pandemic but suffered a severe slowdown in the past year. Sales are down, losses are mounting and the company’s stock price has fallen nearly 90% in the past 12 months. The latest moves are an attempt to revive sales, increase efficiency and restore some of Peloton’s former cachet.
“We need to get our revenues to stop shrinking and start growing again,” McCarthy said in the memo to Bloomberg, adding that the changes are key to getting Peloton’s cash flow positive again. “Cash is oxygen. Oxygen is life.”
Read the full memo from the CEO of Peloton here. Investors cheered the moves, sending the stock up a whopping 11% to $13.18 in New York trading.
In its third known set of layoffs this year, the company will lay off 784 employees in its distribution and customer service teams. Peloton will stop using in-house employees and vans to deliver equipment and shut down 16 warehouses in North America. Instead, it relies on third-party logistics providers, or 3PL, to place bicycles and treadmills in customers’ homes.
Peloton already uses third-party shipping companies JB Hunt Transport Services Inc. and XPO Logistics Inc. for some deliveries and will transfer the remaining internal distribution to those companies. The company acknowledged that such a change may not appeal to all buyers, as some have complained that its third-party delivery services are not on par with Peloton’s own efforts.
“This was a challenge,” McCarthy told staff. “We won’t fix it overnight, but we have no choice but to make it work, so we’re leaning on it and proactively managing our 3PL relationships. We are confident in the plan we have put in place and are encouraged by the progress we are making.”
Peloton is also shedding about half of its customer support team, which is primarily located in Tempe, Arizona and Plano, Texas. The company will use outside companies to handle support requests as needed to increase the number of staff it employs. “These extensive partnerships mean we can ensure we have the ability to scale up and down as volume fluctuates, while still providing the level of service our members have come to expect,” McCarthy wrote.
The phasing out of internal deliveries, distribution and warehouses will cut 532 jobs, while another 252 will disappear from support teams. Peloton said last month it would cut about 570 workers in Taiwan as part of a shift in in-house equipment manufacturing. In February, it laid off nearly 3,000 employees across the company.
Still, McCarthy said the company will continue hiring in key areas, including its software engineering group. “I’m sharing this so you don’t think we’re riding the gas and the brake at the same time,” he said.
The company is increasing the price of its flagship Bike+ by $500 to $2,495 and its Tread treadmill by $800 to $3,495. The increases are a reversal, as the Bike+ was priced at $2,495 before the April cuts. The new Tread price is higher than it was four months ago.
McCarthy acknowledged the turnaround, saying April’s price cuts were needed to move units faster and generate cash flow. “I probably wouldn’t have tampered with prices at all if I had been confronted with different stock statuses when we lowered prices,” he said in an interview.
Peloton at the time was in the early days of an $800 million restructuring plan and was still trying to secure a $750 million bank loan.
The price cuts “at least lowered the perception of the brand,” he said. “So this is a return to historical positioning.”
Peloton is betting the price hikes will help juice sales. During its fiscal third quarter, the New York-based company missed analysts’ estimates – with sales plummeting 24% and losses far greater than expected.
Peloton also said it plans to experience a “significant and aggressive reduction” in its retail footprint in North America beginning in 2023. The company currently operates 86 stores in the US and Canada. McCarthy said in the interview that the number of locations to close will be determined through negotiations with landlords. He said the savings from store closures will be reallocated to marketing and selling his products in other ways.
“We need to be where our customers are when they make purchasing decisions,” McCarthy said in the interview. “They’re increasingly doing that online,” he says, and you can see that in foot traffic.
The announcements come six months after McCarthy was named CEO in a broader management reshuffle. The former director of Spotify Technology SA and Netflix Inc. promised to cut costs, improve Peloton’s products and increasingly move to a subscription model.
The pandemic has been a boon to Peloton’s business, with lockdowns clamoring for consumers to buy bikes and sign up for online fitness classes. But the company overestimated demand, produced too much equipment and mistakenly believed that the increase in demand would continue after economies reopen. After Peloton began to struggle, the board replaced co-founder John Foley with McCarthy, although Foley remains chairman.
Before taking the final steps, Peloton had already moved away from in-house production of devices and moved the production of its bicycles to partners in Asia. The company also implemented a leasing program that could reduce equipment ownership costs and increased the price of its content subscription service by $5 to $44 per month.
Peloton makes other changes, including a return to personal work. Office workers will be required to come at least three days a week beginning Sept. 6, McCarthy said Friday. That’s in line with the approach used by other tech companies, such as Apple Inc., but marks a turn of events for a company that took advantage of the work-from-home lifestyle.
Until now, Wall Street has been skeptical of Peloton’s comeback. Shares continued to fall after McCarthy took the job, remaining about two-thirds lower in 2022. Management is betting that improving Peloton’s fixed costs and raising prices will boost investor sentiment.
“I remain optimistic about the future of Peloton,” McCarthy said in the memo. “That doesn’t mean there aren’t challenges ahead. There will and will be unforeseen setbacks. That is the nature of turnarounds. But I’m confident we can meet the challenges as we’ve come this far in the last four months, fueling my optimism about our ability to achieve our long-term success.”
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